Abstract
Perhaps the most massive and complex HR compliance challenge for employers in U.S. history, the Affordable Care Act (ACA) requires that at this point in the year, organizations be well on their way to preparedness and, of utmost importance, that all departments work together to avoid potentially devastating penalties. This article outlines the role and responsibility of each department (IT, HR and Benefits, Payroll, Finance, Tax and Legal) in meeting the requirements of the law.
The Affordable Care Act (ACA) has rewritten the rules of U.S. workforce management and transformed what was once annual enrollment into a monthly process of administrative tasks.
Deadlines for employers to comply with the ACA’s dizzying array of new eligibility, coverage and reporting requirements are fast approaching. Organizations that fail to get their house in order may face substantial administrative burdens and up to millions of dollars in penalties.
One of the biggest issues I hear when speaking with employers stems from a lack of understanding about everything that is involved. Confusion still exists within many organizations regarding the severity and form of those penalties and which departments and individuals are responsible for handling compliance.
This is not without good reason. The ACA is an extremely complex collection of provisions. This article sheds light on common questions and highlights the critical steps each administrative department should take to prepare to meet the ACA’s challenges. It is crucial that all departments (HR, Benefits, Payroll, IT, Finance and Legal) work together in order for your organization to succeed.
Affordable Care Act Penalties
Penalties under the ACA will be levied through the Internal Revenue Service (IRS) in the form of taxes. There are three primary taxes that can be incurred through noncompliance. They include the “catastrophic penalty” (Sec. 4980(H)a), the “lesser penalty” (Sec. 4980(H)b) and a 40% Excise Tax on “Cadillac” health plans. Penalties can easily reach into the seven-figure range for companies with as few as 1,000 employees. The bigger the company, and the more variable its workforce, the greater the risk of fines.
The Catastrophic Penalty
The ACA requires employers with at least 50 full-time employees (or full-time equivalents) to provide minimum essential health coverage to all full-time employees, or pay a penalty. Some transitional relief applies for 2015 for employers with 50 to 99 employees. “Full-time” is defined as an employee who averages 30 or more hours of service, including all paid hours, paid vacation and special types of unpaid leave.
Employers are required to offer this coverage to all ACA full-time employees—but they will trigger the “catastrophic penalty” if they fail to offer this coverage to at least 70% of full-time employees by 2015, and 95% by 2016. The ACA also requires the coverage be “affordable.” The IRS has provided employers with three safe harbors to ensure that coverage is affordable:
9.5% of Box 1 W-2 wages
9.5% of monthly wages
9.5% of the Federal Poverty Level
Employees are also permitted to go to an Exchange for coverage—but would not be eligible for a Federal Tax Credit/Subsidy if their employer offers them affordable mandated coverage.
Conversations with employers have led me to believe that organizations are generally prepared to meet the 2015 requirement. However, the 95% threshold will be much more challenging to meet. In addition to making sure that the coverage meets the requirements in terms of coverage levels and affordability, the regulations require that the employer be able to document that this coverage was actually offered to ACA full-time employees. This requires accurately tracking all hours of service—a daunting task some companies are choosing to outsource.
Failure to account for unpaid leaves could result in employers inadvertently failing to offer coverage to the full 95% requirement. These penalties are nondeductible and are an addition to the existing costs associated with providing health care.
The Lesser Penalty
Larger employers will be required to reach a second threshold—the Lesser Penalty. In order to comply with this threshold, organizations need to offer a health plan with at least a 60% minimum value (meaning the employee will not pay more than 40% of the plan’s costs of benefits). This is calculated in one of three ways:
By using the Health and Human Services minimum value calculator, with which employers enter information about plan benefits, coverage and cost-sharing terms to determine if the plan meets minimum value.
By applying the safe harbor developed by the IRS and HHS, which is essentially a checklist of coverage requirements an employer’s health plan must meet or exceed.
By obtaining actuarial certification to determine if a plan contains nonstandard features precluding use of the minimum value calculator or safe harbor checklist.
Failure to comply with the Lesser Penalty will result in an annual fine of $3,000 for each full-time employee who purchases health insurance through an Exchange and receives a federal subsidy to do so. This threshold was named the Lesser Penalty because the total amount incurred in penalties would likely be smaller than the total Catastrophic Penalty. In fact, it cannot legally exceed the amount that would be incurred from the Catastrophic Penalty.
The Excise Tax
Although 2018 may seem like an eternity away, it will be here before one can say “Excise Tax,” and by then, you may find your company paying the penalty. Employer plans whose costs exceed set limits starting that year will have to pay the Excise Tax. The purpose of this tax is to try and reign in the nation’s overall health care spending over time by penalizing higher cost plans. For the past 49 consecutive years, health care costs have historically risen well above inflation and now account for almost 20% of the gross domestic product.
For employers whose health care costs (including both employer and employee contributions—including pretax contributions to a flexible savings account or a health savings account) exceed $10,200 for individual coverage or $27,500 for family coverage, an Excise Tax will be triggered equal to 40% of the amount that exceeds those limits. The employer is held responsible for the costs of this nondeductible penalty.
Most employers are not worried about crossing this threshold—at least not right now. But beware: these limits are not so high that they are unreachable, especially at the rate premiums have been rising. Research by Towers Watson suggests that as much as 60% of all employer plans will, at some point, be subject to this tax.
What the Excise Tax Could Look Like
Say your company covers 500 individuals and 1,500 families. Let us say your cost for individual coverage exceeded the individual limit ($10,200) by only $350 per individual and the family limit ($27,500) by $725 per family. The annual penalty incurred would reach $505,000 and is nondeductible. Scale that to an organization with 1,800 individuals and 6,200 families, and the tax will exceed $2 million dollars. That is not chump change, even for a large company.
Departmental Roles in Driving Compliance
We are finding that there is no single department solely responsible for ACA compliance. Information technology, human resources, payroll, finance, tax and legal all have a role to play when it comes to mitigating potential ACA penalties, and each must have a proactive plan in place.
Information technology is responsible for aggregating data and preparing records for multiple health insurance marketplaces and the IRS. The department must possess a technological framework capable of extracting information from disparate systems across other departments and business units and merge it to perform ACA calculations. This synchronization allows for accurate data reporting to meet state and federal requirements.
Your company should assess existing IT systems to determine if they have the performance and software capabilities to synchronize the required data and perform the necessary reports and calculations.
Bridge siloed data, correctly aggregate data and harmonize transaction and record-keeping systems so they provide on “single source of truth” for internal, health insurance marketplace, tax reporting and auditing purposes.
Human resources and Benefits should identify ways to lower health care benefits costs, mitigate risks and oversee core human capital management components, including recruiting, onboarding and workforce balancing that play into ACA compliance.
The ACA’s mandates will likely span the course of years, which will result in greater complexity and an increase in administrative tasks for department staff. As regulations change, and they will, HR and Benefits departments will need to work with Legal and other internal partners to develop baseline knowledge of key requirements and deadlines affecting employees.
One of the most critical challenges facing HR and Benefits leaders are leaves-of-absence and employee misclassifications. Failure to ensure accurate reporting could result in significant penalties that can reach millions of dollars. Some other tips for these departments include the following:
Enhance and update staff knowledge of ACA requirements by leveraging additional resources and partnerships with third-party experts.
Improve expertise by hiring experts who monitor the ACA changes and evaluate compliance options. This allows organizations to address compliance proactively rather than reactively.
Refine communications tactics as the ACA evolves to ensure you are connecting with your employees should a change occur that affects them.
Payroll should serve as the primary record keeper for hours of service. It should ensure health benefits have been offered to enough full-time employers, in accordance with the ACA’s Employer Shared Responsibility provision.
Payroll and timekeeping are particularly difficult to manage due to the daunting administrative requirements and historical edits that are usually made over time. These can affect look-back period calculations that are used to determine which employees are full-time. Because of the administrative complexities, many companies are electing to work with a third-party or to outsource reporting entirely. Some tips include the following:
Monitor employee wages, benefits deductions and taxes for compliance issues as regulators continue to add more ACA reporting requirements. Make sure this is done at the employee level, not the company level.
Ensure information is in sync with ACA rules and educate staff on the importance of accurate weekly reporting.
Finance and the CFO manage ACA integration within the organization and communicate with company leadership to ensure ACA compliance remains a top business priority. Finance is responsible for avoiding the triggers that result in penalties.
Remember, an employer can be subject to a nondeductible penalty for the following reasons: failure to offer adequate, affordable health care coverage to full-time employees and dependents, or if at least one employee receives a federal premium tax credit or subsidy for coverage on a Health Care Exchange. Some tips include the following:
Develop a strategic master plan to ensure senior managers are proactively making decisions on ACA compliance.
Share access to the right tools throughout the organization so that everyone is well equipped to do their jobs effectively and accurately.
Ensure a sufficient budget is available to support ACA compliance efforts.
Monitor ACA-related expenses to avoid any surprises.
The Tax Department should engage in multiple internal partnerships within your organization. For example, Tax should work with Finance to audit IRS penalty estimates and file appeals. In order to do this, Tax will need to coordinate with HR and Payroll to access records validating employee information from human capital management systems and full-time status calculations.
Tax is also responsible for providing documentation to experts who can accurately identify and interpret the organization’s ACA tax requirements. The CFO has a role here as well, as he signs an organization’s tax filing documents and verifies their accuracy. Some tips include the following:
Develop and build on ACA knowledge among tax staff.
Begin building internal relationships with relevant departments to ensure the full team is collaborating and working together toward compliance.
Consider hiring experts who understand evolving tax codes and can apply their knowledge to compliance goals.
The Legal Team should serve as the go-to ACA experts and compliance specialists for your business, helping navigate complex and cumbersome challenges. Leverage Legal’s expertise when other departments raise questions about the language of ACA. This team must also handle ACA-related appeals. Some tips include the following:
Get up-to-speed on all ACA requirements and coordinate with internal partners and their teams to work toward ACA compliance.
If you have union employees, determine how to comply while honoring agreements with certain rules—and even potential exemptions.
Educate existing employees and departments on their role in ACA compliance in order to protect your organization.
Conclusion
There is no doubt that department leaders will play a vital role in their organizations’ compliance success. With all departments working together and the right data infrastructure in place, organizations can ensure an organized and planned approach to ACA while preventing burdensome administrative hassles and avoiding high penalties for noncompliance.
We also cannot overlook the importance of the right technology solutions when it comes to ensuring a reliable first-defense from ACA penalties. In order for business leaders to succeed, they must have reliable and quick access to the right data, and this information must be able to be shared seamlessly throughout the organization.
Employers should keep in mind that the data elements needed to determine an employee’s ACA full-time status as well as those that must be reported annually to the IRS are part of the employee’s permanent tax file and must be retained for 7 years. Moreover, these data will be critical in appealing penalty assessments.
Because of the ACA’s complexities and the difficulties of integrating so much data across so many departments and business units, many organizations will benefit from choosing a trusted partner who has deep knowledge of the ACA, especially as those experts and their solutions will need to be agile in response to this evolving regulatory guidance. Experts can help plan the critical steps toward adopting the right strategy for well-informed decisions. This allows employers to focus on their core business and bottom line.
Regardless of the approach that works for your organization, you should already be planning now and well on your way to toward compliance, as regulatory deadlines are rapidly approaching.
Footnotes
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author received no financial support for the research, authorship, and/or publication of this article.